Tele2, Ziggo outliers in cost structure on Dutch market

Friday 18 March 2016 | 14:26 CET | Background

Ziggo and Tele2 show the biggest variation in cost structure among the biggest operators in the Netherlands, according to an analysis by Telecompaper. The other three operators - KPN, Vodafone and T-Mobile - have much more similar margins, according to the figures available.

We took the group results for the five biggest operators in the Netherlands, with no breakdown according to divisions (M7 Group was excluded as it reports very few figures). Revenues and EBITDA figures from the profit-and-loss accounts were used. The difference in revenue and EBITDA is the operating costs (opex), including cost of goods sold (COGS) and sales, general & administrative costs (SG&A). KPN and Ziggo provide a breakdown of opex, but Vodafone, T-Mobile and Tele2 do not. From the cash flow figures, we took numbers for capex, and using all the costs, calculated the margins as a percentage of revenue. The difference between EBITDA and capex we call free cash flow (FCF), for which we also calculated a margin.

Accounting differences

By combining COGS and SG&A to calculate opex and then adding capex, we limit the effects of differences in accounting (for example, leasing versus sales of customer equipment). The differences in scale are also eliminated by comparing margins as a percentage of revenue.

Ziggo and Tele2

The overall view is that the ratios for opex + capex and EBITDA and FCF to revenue are relatively close for all the operators, but Ziggo and Tele2 show a somewhat different picture. Ziggo appears a company with relatively low costs and high free cash flow, but it's important to note that a good part of the cash flow goes to paying interest on its debt. We note that UPC is left out of the comparison; figures for 2014 are the old Ziggo, excluding UPC, while 2015 figures are the new Ziggo, including UPC.

The picture is reversed at Tele2. This is due to the fact that the company is still in the roll-out phase of its LTE network, which results in start-up losses. Tele2's free cash flow has been negative since Q4 2013. It has spent around EUR 430 million on the LTE network to date, including EUR 161 million for the spectrum licence in Q1 2013.

KPN, Vodafone and T-Mobile all show a fairly similar picture in terms of the margins calculated. T-Mobile has traditionally been a company with relatively low costs and a high EBITDA margin, but its advantage has lessened in recent quarters.

2016

Cost structure will remain an important issue for the operators in 2016.

KPN said recently at its Capital Markets Day that the ratio of capex to revenue should fall to 15-17 percent in the medium term, while the EBITDA margin should grow by 3 percent points.

At Ziggo, the comparative basis will improve starting in Q1 2016. UPC was consolidated from the middle of Q4 2014, so Q1 2015 is the first full period after the acquisition. This year the synergies from the takeover should start to show in Ziggo's results.

Vodafone has shown a relatively stable performance in recent quarters, with gradually improving growth. Its EBITDA margin is not far from its historical peak, despite the start-up costs for Vodafone Thuis (fixed services). As it gains scale, the margin may improve further.

Tele2 aims for breakeven EBITDA within three years of the launch of its mobile network. Its mobile activities are still in the red, with a new low point reached in Q4 2015. It should complete the network roll-out very soon, and then the company has another three years to put the mobile division in the black. Of the five operators, Tele2 is currently showing the strongest revenue growth, supported by modest customer growth and increasing ARPU.

T-Mobile could go either way, given the continued possibility of a sale of the company by Deutsche Telekom. The question is whether its margins can increase further. The gradual loss of Tele2 as MVNO customer (as Tele2 moves to its own network) does't help, although it will still collect revenue from leasing tower sites. An eventual buyer for T-Mobile will likely focus more on revenue growth. Of all the operators, T-Mobile has the weakest revenue trend at the moment (-16% in Q4 2015, in part due to one-time factors). There is room for improvement here, as the value of the business has fallen to a low point.

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